ANALYSIS-China auditors set to take on Hong Kong stock market

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HONG KONG, Dec 30 (Reuters) – Hong Kong’s pending acceptance of Chinese accounting standards will mark an important advance in Beijing’s drive to globalise its financial sector, but could also challenge international investors with reports prepared by an industry prone to scandal.

A proposed rule change likely to take effect next year would see Hong Kong’s stock exchange let locally-listed Chinese firms report using their home accounting standards, a move designed to lower costs and keep Hong Kong competitive with Shanghai.

But concerns about supervision of Chinese auditors have led to delays, making it unlikely the exchange will meet its Jan 1 target date to implement the change.

The change will also lead to variant results for certain industries, such as insurance, although those differences are expected to fade over time as standards converge.

“There is a confidence issue,” said Judy Wong, president of the Association of Chartered Certified Accountants (ACCA) Hong Kong, a group whose members stand to lose substantial business to lower-cost Chinese accounting firms under the rule change.

“The (Chinese) Ministry of Finance should let the public know how they vet the applications from mainland accounting and audit firms and what are the criteria,” she said, adding ACCA agrees with the proposal’s direction, but issues need to be resolved.

The unification of standards will see China firms whose shares trade in Hong Kong, known in the territory as H-shares, allowed to post a single set of results for each reporting period identical to the report they put out for their China-listed shares.

SPOTLIGHT ON INSURERS

Most Hong Kong-listed Chinese firms are expected to use their home standards for their Hong Kong reports once the move becomes official, both as a money-saving measure and to reduce confusion that often occurs due to differences in the reports released in China and Hong Kong.

Insurance companies such as China Life and Ping An Insurance now see some of the greatest variation due to different treatment of investment gains and losses. Others such as banks, airlines and resource companies would see little or no change.

Investors do not expect any big impact on stock prices from the accounting change.

Patrick Yiu, a fund manager at CASH Asset Management in Hong Kong, said he will not change his investment strategy after the new accounting standards are adopted, and that the move should be welcomed by the broader market.

“Though there is some concern over discipline among auditors in the mainland, I don’t think it will be a major issue, and many major Chinese enterprises will do their best to disclose the most useful information to their investors,” he said.

Hong Kong’s move testifies to the growing importance of China for international investors, who are increasingly eyeing a steady stream of Chinese IPOs that are only open to most outsiders via off-shore listings in places like Hong Kong.

Hong Kong is likely to top global IPO fund raising this year thanks to a strong influx of new China listings. It could raise another $48 billion next year, even as Shanghai takes over the top spot with $56 billion in new offerings, according to Ernst & Young forecasts.

‘MALIGNANT TUMOUR’

Mainland accounting firms that prepare reports under Chinese standards charge about one-third of their Hong Kong counterparts, making them more attractive in terms of price.

But any cost gains could easily be offset by an industry where book-cooking scandals were so common less than a decade ago it led former Premier Zhu Rongji to call fraudulent accounting a “malignant tumour” that threatened the country’s economy.

To help minimise that risk, Hong Kong, under the proposal it is now considering, would only allow in Chinese auditors that have passed muster with China’s Finance Ministry and securities watchdog, the China Securities Regulatory Commission.

Other checks and balances are also being discussed.

“We expect it will come up with a list, it should not be more than five firms,” said Jack Chow, a Hong Kong-based partner at global accounting firm KPMG.

That list is expected to include domestic leaders like RSM China, Shinewing Certified Public Accountants and BDO China Shu Lun Pan CPAs, with future approvals expected to follow.

Hong Kong’s move is also seen as an acknowledgement of the fact that Chinese accounting standards are rapidly converging with international standards.

One major difference that remains between China and international standards is accounting for asset impairment, which is responsible for some of the big differences in results for investment-oriented firms like insurers.

China standards do not allow for the reversal of asset impairment if initial provisions later turn out to be overstated. But international accounting does allow for such reversal.

The Chinese are now working with their international counterparts to resolve that difference said Chris Joy, executive director of Hong Kong Institute of Certified Public Accountants.